Bolstering China's Breadbasket

Central China is populous and resource-rich but lags far behind coastal areas economically. Can Beijing speed up the pace of development there?

First there was the "Develop the West" policy in the late 1990s, an effort by China to boost growth in its lagging western provinces. In 2003 came the grandly named "Revitalize the Northeast," aimed at lifting the fortunes of the rust-belt provinces. Now, Beijing has come out with "Promote the Rise of Central China", its latest initiative to manage the country's runaway yet uneven economic growth.

There is no doubt that central China, made up of the six provinces of Henan, Hunan, Hubei, Shanxi, Jiangxi, and Anhui, is an important chunk of the country. Although the region accounts for just 10% of the Chinese land mass, its population of 361 million people makes up 28% of all China. Henan alone numbers nearly 100 million, making it China's most populous province.

The region contributed 20.5% towards China's total $2.68 trillion gross domestic product last year, and it is a major industrial base with steel and textiles production and rich in resources including coal, molybdenum, and copper. It also leads China in agricultural production including key staples such as rice, wheat, and corn, while its location makes it a key power and logistics hub for the whole of the mainland.

Failing to Keep Pace

"The central region can be considered the backbone of China," says Chen Xiushan, a professor at the Institute of Regional Economics & Urban Management at People's University in Beijing. "If China cannot straighten its back, how can the overall economy stay stable and continue its long-term development?" he asks rhetorically.

Why the focus on boosting central China now? Because by a number of economic indicators, the region has fallen behind the fast-developing coastal provinces. Even while the neighboring region of western China has until now garnered most of the attention, central China has failed to keep pace with national growth rates for income and urbanization.

Urban incomes in the central provinces reached $1,144 per year in 2005, compared with $1,737 in China's eastern provinces. And more striking still was the $384 per capita income in this region's rural areas (compared to $613 on the coast), where 75% of central China's population lives. Small wonder that five of the six provinces of central China are the top sources of migrant workers in coastal factories.

Sending the Heavy Hitters

Although central China's GDP growth of 12% last year exceeded the national average of 10.7%, foreign trade is tiny. In 2004 it only amounted to a paltry 3% of the national total and hasn't grown much since.

"Frankly speaking, central and western China's GDP growth has relied mainly on investment," said Xu Guangchun, Henan party secretary, on Apr. 25, in response to a BusinessWeek query. "Consumption and exports have made little contribution to GDP," Xu said at a press conference on the eve of a major exposition focused on boosting investment and trade in central China held in the provincial capital of Zhengzhou, Henan.

The conference lineup reflects just how serious Beijing is about developing the region. The three-day event, which opened on Apr. 26, featured Commerce Minister Bo Xilai and the chief executives of Hong Kong and Macao, Donald Tsang and Edmund Ho, both of whom no doubt were strongly encouraged to attend by Beijing.

Also in attendance were Senior Minister Goh Chok Tong, former Prime Minister of Singapore, and a minister of commerce from South Korea and vice-minister from Japan. The opening night was crowned with a star-studded musical extravaganza featuring Hong Kong, Taiwanese, and mainland pop stars performing in the newly built, huge Henan Sports Stadium.

Success Not Yet a Reality

"Promoting the rise of the central region is integral to China's overall development strategy," said Vice-Premier Wu Yi, the highest ranking official to attend from Beijing, who will travel to Washington this month for meetings with U.S. Treasury Secretary Henry Paulson. "The exposition will be continued in the long run to attract more investment from the outside world," she said on Apr. 26, citing the region's strong energy, raw materials, and labor resources to the assembled business and political dignitaries at the massive new Zhengzhou exhibition hall.

That's the idea, but it won't be easy to achieve. Next year, China will see the end of years of favorable tax policies used to lure foreign businesses to invest in favored industries and regions. And despite conference attendance by representatives from more than 300 multinationals, including executives from Procter & Gamble (PG) and the American Chamber of Commerce in China, the reality is that most foreign investment is still heading to the better developed consumer markets of the coast.

Only 10.9% of foreign investment went to central China from 2001 to 2004, while the proportion of foreign enterprises opting to invest in coastal China actually grew from 78.5% in the period from 1991 to 2000, to 85.3% from 2001 to 2004. That tracks with a 2007 survey by the American Chamber of Commerce in China, which found that only 4% of its member companies were investing in central China. "First-tier markets are increasingly competitive and presenting new challenges to investors, but continue to garner the lion's share of foreign investment," says Amcham's annual white paper released on Apr. 26.

Backing Up the Rhetoric

Indeed, with its large rural population, numerous heavy industrial state enterprises, and murky investment environment, central China faces major obstacles to growth. According to Amcham, unclear regulations were cited as the No. 1 business challenge in second- and third-tier cities by U.S. companies. No. 2 was inconsistent interpretation of regulations by local officials.

"The challenges are quite obvious now in central China," says People's University's Chen. "Bureaucracy in relatively undeveloped regions always leads to lower efficiency compared with that in developed cities. As a result, investors have to spend more money, and that becomes an obstacle for them." Adds Chen: "Central China has weak connections both inside China and outside."

Beijing has signaled that it wants to promote the rise of central China, as its lofty slogan suggests, but the real challenge is to back up the rhetoric with genuine action. That isn't going to be easy.

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